wholly government owned and operated, though not a government institution
government role exerted through, e.g., members on board of directors are government officials or are appointed by President or Governor; government defines mission in corporate charter; or through regulation
Purchase loans, in whole or in part, from private lenders
Provide credit to private lenders who use certain qualifying loans as collateral for the credit they receive (differs from purchasing loans because it does not involve loan servicing except in case of default – differs from direct lending because it is collateralized)
Congress passed the Federal Farm Loan Act in 1916, establishing the nationwide Farm Credit System — a network of credit cooperatives — to be a reliable source of funding for farmers, ranchers and aquatic producers during good times as well as bad. This included 12 regional farm land banks (FLBs) with most of the original capital supplied by the government. It was intended that the farmer-borrowers should ultimately own the co-op banks. Responding to farm price deflation following the first World War, Congress passed the Agricultural Credit Act of 1923, which added 12 Federal Intermediate Credit Banks (FICBs) to the Farm Credit System (one in the district of each land bank with capital supplied by the government). In 1933, Congress passed two more important laws: 1) legislation re-capitalizing the FLBs; 2) an act establishing 13 farm credit banks and a short-term credit delivery system through locally owned Production Credit Associations. Supervision of all 37 federal agricultural credit institutions was consolidated under the Farm Credit Administration. By 1968, all of the Farm Credit System lending entities had repaid their federal capital debt and were completely owned by their borrowers. The Farm Credit Act of 1971, plus 1980 amendments, expanded the range of services that Farm Credit institutions could offer to include rural home mortgages, leasing services, and international and rural utility lending.
Provide credit for farmers, farm enterprises and rural home ownership
Provide credit that is not susceptible to fluctuations in farm prices or the overall economy
The Federal Farm Credit Banks Funding Corporation manages the sale of System wide securities that raises funds in capital markets. (It was established as a stand-alone System institution, with two board members who are not affiliated with other System institutions and who are appointed by directors elected by the System banks after consultation with the Secretary of the Treasury and the chairman of the Federal Reserve Board.)
Federal Agricultural Mortgage Corporation (Farmer Mac) raises funds by issuing bonds in the capital markets, and then lends to other FCS banks
Ownership/ Governance method
Farm Credit Administration oversees the various financial institutions
Loans to farms, farmers and rural residents for land, working capital, and rural homes
Not enough credit on terms appropriate for farming
Lack of credit and capital to poor rural areas
Government sponsored credit programs for land, operating capital and rural homes
Farm Credit Systems lending to participating financial institutions
Public provision of credit during economic downturn
Public provision of credit to neglected areas and sectors
Substantial losses from loan defaults at various times has required additional government capital and reorganization of the system
T HE U.S. E XPERIENCE: F ARMING
Counter-Cyclical Lending – Reconstruction Finance Corp The Reconstruction Finance Corporation (RFC) by the Hoover Administration in February of 1932 to make emergency loans to banks and railroads. Five thousand financial institutions, railroads, and life insurance companies received loans by July of that year, but too much was going to a few large firms. Authority was expanded that July to lend to municipal governments. Further expanded under Roosevelt in 1933, including authority to buy bank stocks (to provide fresh capital), and 7000 loans were made during 1933. Combined with other agencies in 1939 to form the Federal Loan Agency. After 1940, it made loans to foreign governments in support of war effort and to financial military construction in the US. After the war, scandals when Senator Fulbright's Senate Banking Committee revealed in early 1950s evidence of favoritism and influence-peddling at the RFC. Reorganization followed, but the agency stopped operating in 1956. T HE U.S. E XPERIENCE: C OUNTER- C YCLICAL
Counter-Cyclical Lending – Tennessee Valley Authority The TVA was established in 1933 to finance development and the provision of electrical power to rural areas along the Tennessee River. FDR wanted “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise”. Created in wake of financial difficulties experienced by privately owned utilities during the Depression. The TVA was a coordinated plan involving industrialization, soil conservation, reforesting, and the provision of electricity. It constructed dams (built 5 and improved 20), power plants and constructed a system of inland waterways in Tennessee, Alabama, Mississippi, Kentucky, Virginia, North Carolina, and Georgia. The TVA also engaged with communities by developing and selling fertilizers, electricity, building flood control projects, improving the navigation of the meandering river, malaria control, and engaging in programs of reforestation and soil conservation. President Dwight D. Eisenhower later condemned it as an example of New Deal "creeping socialism." Today is one of the lowest cost producers of electricity in the US. T HE U.S. E XPERIENCE: C OUNTER- C YCLICAL
Not enough new lending during economic downturn, and as a result the downturn persists longer that it would otherwise. Sometimes caused by creditworthiness problems at financial institutions, sometimes by system illiquidity and sometimes by loss of confidence in capital markets.
Privately owned utilities got into financial trouble
Municipal government finance is pro-cyclical
Lack of credit and capital to poor rural areas
Government sponsored credit creation through RFC
Government funded investment through TVA
Provision of investment funds during economic downturn
Indirect, targeted government lending through RFC
Government sponsored corporation used to fund investments and rural development
Some corruption emerged – or at least was detected - in 1950s
T HE U.S. E XPERIENCE: C OUNTER- C YCLICAL
T HE U.S. E XPERIENCE: H OUSING Federal Home Loan Bank System Created in 1932 to increase supply of credit to home finance by advancing loans to member banks which post home mortgage contracts are collateral. This helped local economic development by assisting local lenders to extend affordable credit to their communities for more affordable-housing, small businesses, community development and agricultural funds. Community Investment Program (CIP) makes loan advances to fund community and economic development projects by providing below-market-rate loans to banks that extend long-term financing for housing and economic development that benefits low- and moderate-income families and neighborhoods. Federal National Mortgage Association (Fannie Mae) Established in 1938 as a wholly owned subsidiary of the Reconstruction Finance Corporation (RFC). Its mission was to add fresh capital to home mortgage market by providing a secondary market for mortgages insured by the Federal Housing Administration, and after July 1948, for some mortgages guaranteed by the Veterans Administration. In 1968, split into privately owned (partially publicly controlled) Fannie Mae and government owned Ginnie Mae (Government National Mortgage Association). Ginnie Mae is managed by Department of Housing and Urban Development, a federal agency responsible for the federally aided housing programs and management and for liquidating functions of former FNMA.
Government National Mortgage Association (Ginnie Mae) Ginnie Mae securities are the only mortgage-backed securities that offer the full faith and credit guaranty of the US government. In 1970, Ginnie Mae solved problems of mortgage market inefficiencies by pioneering securitization. This involves buying similar mortgages, pooling them together, and then issuing claims on this pool in the form of mortgage-backed securities (MBS). Mortgage lenders pool packages of qualifying FHA, VA, RHS (Rural Housing Service) or PIH mortgages and convert them into securities. Ginnie Mae guarantees investors the timely payment of principal and interest on these securities. T HE U.S. E XPERIENCE: H OUSING
shortage of capital in mortgage market – constrained supply of mortgages
mortgages were illiquid assets
varied underwriting standards
loan terms were inconsistent with borrowers’ ability to pay
Created a secondary market for home mortgages which put fresh capital back into market
Established conventional loan terms for mortgages (30-year fixed, amortized, 80% down, income to cover 28% of loan service)
Created the securitization process
Too successful, face major jealousy from major US banks
Accounting problems, failure to properly comply with new derivatives accounting rules
T HE U.S. E XPERIENCE: H OUSING
MAINE BOND BANK (MBB) Created in 1972 to provide public purpose financing to cities, counties, school systems, water districts, sewer districts and other governmental entities. Public purposes include school construction or renovation, road improvements, upgrades to sewerage treatment plants or water systems, landfill closures, purchase of public safety vehicles, and other municipal construction or renovation projects and capital acquisitions. The Bond Bank enhances municipalities’ access to national and international capital markets. The MBB sells tax-exempt bonds and taxable bonds under its name and uses the funds to lend directly to localities. Municipalities apply for credit to the MBB which evaluates their proposals for legal and economic validity. Borrowers must also get approval from their own governing entity. The MBB consolidates credit applications from eligible municipals and then sells bonds on their behalf under the MBB name. The larger issuance creates greater investor interest because of greater liquidity and lower underwriting costs (due to volume). It also has a high credit rating (AAA by Standard & Poors and Fitch, and Aa1 by Moody’s) which helps lower borrowing interest rates. The MBB can issue a bond representing a single municipality if the borrowing needs are great enough. T HE U.S. E XPERIENCE: M UNICIPAL
Provide public purpose financing to cities, counties, school systems, water districts, sewer districts and other governmental entities.
Issues tax-exempt and taxable bonds in the capital market.
It does not receive any direct appropriations from the State, although it does receive grants from the State for administering the Clean Water Act and Safe Drinking Water Act.
Ownership/ Governance method
The MBB is an independent agency of the State of Maine. It is administered by a board of commissioners that include the Treasurer of State, Superintendent of Banking and three commissioners appointed by the Governor. It is set up as a corporation that is wholly owned by the State.
Municipal bond market is inefficient in several ways. The small, heterogeneous issues reduce liquidity. There are high costs for underwriting as well as for secondary market trading in OTC markets. (See Dodd 2005). The tax-exempt program creates further inefficiencies by making bonds attractive to only high-net wealth individuals with US tax liabilities.
Create greater homogeneity (and hence liquidity) and enhance credit rating in order to lower borrowing costs.
Consolidate municipal government public purpose borrowing needs into large, higher credit rated issuances.
The history begins with the National Defense Education Act of 1958. That law authorized the appropriation of $295 million over the next four years, to provide capital for student loans to be made by colleges, with the institutions putting up $1 for each $9 in capital from the federal government.
National Direct Student Loan program involves 3,400 universities, colleges and educational institutions.
Guaranteed Student Loan Program created in 1965. Federal government covered 80% (later 100%) of states’ losses on their student loan programs.
Student Loan Marketing Association created in 1972. Its function is to provide a secondary market in student loans by 1) buying student loans from banks and other lenders, thereby becoming the owner of the loan and the one responsible for collecting it when due, and 2) lending to banks, up to 80 percent of the face value of the student loans made by that bank, with those loans being the collateral. The effect is to inject fresh credit into banks and other lenders so as to increase the supply of student loans.
Provide direct loans to students and credit to qualified financial institutions providing credit to students.
Loan terms that were affordable and enabled the student to repay loans without excess burden following their education.
“ To assure that all qualified students in need of an educational loan are able to obtain one, and that repayment arrangements are manageable when the borrowers leave school.”
Initial capital was in form of a line of credit to Treasury overseen by HEW (Department of Health, Education and Welfare – since abolished). Government appropriations working capital for loan purchases, line of credit from Treasury and ability to issue securities.
Ownership/ Governance method
Government owned corporate structure, later privatized with some retained government control. Initially organized as government sponsored private corporation where stockholders limited (initially) to financial institutions and educational institutions. President of the US appoints 7 of 21 board members.